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Regulators Save Evil Payday Lending Banks From Themselves: Moody's

That, at least, is the view of Moody's, which argues in a report published Monday that stricter regulation of payday loans will have just a "minor effect on profitability," while helping banks such as
U.S. Bancorp(USB - Get Report) and
Wells Fargo(WFC - Get Report) steer clear of "significant legal, reputational, consumer protection, compliance, and credit risks."

Payday, or "deposit advance" loans, are touted by lenders as an easy way for cash-strapped borrowers to get an advance on their paycheck. Borrowing periods are short--often less than 12 days, but fees average about $10 for every $100 borrowed, according to Consumer Financial Protection Bureau (CFPB) data cited by Moody's. That's an annual interest rate of more than 300%, according to the CFPB. In addition to U.S. Bancorp and Wells, the Moody's report mentioned
Fifth Third Bancorp(FITB - Get Report) and
Regions Financial(RF - Get Report) as banks that practice deposit advance lending.

Regulators have been cracking down on the practice, however. Last Thursday the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) issued guidance to banks concerning deposit advance loans. The guidance imposes strict limits on the product, requiring, for example, that banks evaluate borrowers' ability to repay the loans, and restricting the number of times banks can make the loans to the same customer. The
Federal Reserve also issued a written statement warning about risks associated with the loans, but proposed no specific rules.

Moody's argues the regulatory attention will drive banks out of the space, which should enhance their creditworthiness. On the other hand, it negatively impacts the creditworthiness of privately-held companies such as
Ace Cash Express,
CNG Holdings and
Speedy Group Holdings Corp., since these companies "obtain a substantial proportion of their revenues from U.S. payday loans," according to Moody's.

ACE is owned by JLL Partners, whose founder Paul S. Levy drew some attention last year when he defended the private equity business in an interview with The New York Times. He did not specifically address payday lending in that interview. However, he referred to private equity as "a pretty honorable industry."

While Levy told the newspaper he supported President Obama in 2008, a search of campaign finance records shows he has also supported several Republican Congressional bids. Speedy Group Holdings is backed by FFL, a buyout firm whose CEO and Chairman, Tully Friedman, is also Chairman of the American Enterprise Institute, a conservative think tank. Calls to Levy and Friedman weren't immediately returned. The owner of CNG could not be determined.

Spokespeople for both Wells Fargo and Regions stated via email they are "reviewing the guidance" issued by regulators but have no further comment. Email messages to spokespeople at Fifth Third and U.S. Bancorp weren't immediately returned.

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